Mend, Don’t End, Fannie and Freddie

Washington Monthly

Conservatives blame the mortgage giants (wrongly) for the financial crisis, and both parties want them dead. But to finish the job of financial reform without destroying the housing market and costing taxpayers billions, we need to let them live.

By Bethany McLean    March/April/May 2016

It’s been almost a decade since the slow-rolling financial crisis, which reached its grand finale in the fall of 2008, got started. But as the response to The Big Short, the Academy Award-nominated film about the crisis based on Michael Lewis’s book of the same name, shows, there’s still a big fight about what actually went wrong. Some on the right wing immediately decried the movie, which focused on Wall Street’s greed, for ignoring the problems with government policies encouraging homeownership—specifically, the role of the so-called government-sponsored enterprises (GSEs), the Federal National Mortgage Association and the Federal Home Loan Mortgage Association, better known as Fannie Mae and Freddie Mac.

While most Americans don’t know what Fannie and Freddie do, many of us are in an intimate financial relationship with them involving the most important financial instrument in our lives—our mortgage—and the most important asset—our home. The way we finance housing, which makes up some 20 percent of the U.S. GDP, affects anyone who has a stake in our economy.

The idea that these little-understood but critically important companies caused the crisis is just the icing on top of the controversy about Fannie and Freddie, which were created by Congress to serve the dream of the United States as a society of individual homeowners. The two are essentially giant insurance companies. They stamp mortgages made to American homeowners with a guarantee that they’ll pay the principal and interest if the homeowner can’t. Their stamp makes it possible to package the mortgages backed by homeowners’ monthly payments into securities, which are then sold to investors, who otherwise wouldn’t want to bet their money that you and I will pay in full and on time. For years, although Fannie and Freddie had all the trappings of normal companies—shareholders, boards of directors, stocks that traded on the New York Stock Exchange—they were also, in part, government agencies, with a congressional mandate to foster homeownership. Everyone always believed that if there were a crisis, the government would rescue them. Critics hated their government-granted political and financial power, their structure—wasn’t it impossible for them to serve both shareholders and homeowners?—and the very idea that the government needed to be involved in the housing market.

Most people who weren’t paying close attention probably date the beginning of the global financial crisis at September 15, 2008, the day Lehman Brothers declared bankruptcy. But a few days earlier, on September 6, the U.S. Treasury put Fannie Mae and Freddie Mac into a status called “conservatorship,” a kind of government life support system hooked up because the rapidly swooning mortgage markets had put Fannie and Freddie in mortal peril, and their failure would have caused global economic chaos. The Treasury gave Fannie and Freddie an immediate $200 billion line of credit.

The conservatorship was orchestrated by Hank Paulson, then secretary of the treasury, who told President George W. Bush in a meeting at the Oval Office that it was, in essence, a “time out.” According to the rhetoric in Washington at the time, that time out was supposed to end with the death of Fannie and Freddie and the creation of some better, less conflicted, more pure way of financing homeownership. “This is an opportunity to get rid of institutions that shouldn’t exist,” said Paul Volcker, the revered former chairman of the Federal Reserve, in 2011. Said President Barack Obama in 2013, “I believe that our housing system should operate where there’s a limited government role, and private lending should be the backbone of the housing market.”

And yet, here we are in 2016, and—surprise!—the companies are still very much with us. The Dodd-Frank Wall Street Reform and Consumer Protection Act, which was supposed to reshape the financial sector and which President Obama signed into law in the summer of 2010, quite deliberately did not deal with Fannie and Freddie. Nothing has happened since then, either. The GSEs remain wards of the government. As the longtime housing analyst Laurie Goodman wrote in a 2014 paper, “The current state of the GSEs can best be summed up in a single word: limbo.” It turns out that solving the problem of Fannie and Freddie is the most difficult problem of the financial crisis.

Meanwhile, the mortgage market in the United States has effectively been nationalized, too. In fact, it is precisely the opposite of what President Obama said he wanted. According to Goodman, from 2008 to 2013 the government, mainly in the form of Fannie and Freddie, was the major source of credit for most people who got mortgages in the five years following the crisis. This trend hasn’t changed. Goodman recently noted that the “private label” market—mortgages packaged into securities by Wall Street, rather than by Fannie and Freddie—which hit $718 billion in 2007, plunged to $59 billion in 2008 and has not been above $64 billion since.

Nor have Fannie and Freddie shrunk. They still have some $5 trillion in securities outstanding. By one important measure, they are in more precarious shape than they were in the run-up to the crisis: thanks to a 2012 amendment to the terms governing their conservatorship, the government is taking almost every penny of profit that the two companies generate, so Fannie and Freddie have not been allowed to rebuild any capital, which could absorb losses in the event of another downturn in the housing market. “The two mortgage funders are effectively federal bureaucracies, stripped of their independence, with basically zero capital, but still dominating the market for mortgage financing,” wrote the conservative pundits Alex Pollock and James Glassman in a recent Politico piece. “We are faced with running this business with really no cushion. It is a challenging situation for us,” Fannie Mae CEO Timothy Mayopoulous said on a conference call in early 2015. “It’s the last unsolved issue of the financial crisis, and the ramifications are enormous for everyone,” says Ryan Israel, a partner at a hedge fund called Pershing Square.

Not only is the issue unresolved, signs of movement toward resolution are few. The omnibus spending bill President Obama signed in December contains a provision effectively preventing the administration from taking any action, and leaving it up to Congress. And the issue has barely been mentioned by any of the 2016 presidential candidates.

This broad silence reflects the genuinely thorny nature of the problem, but also the fact that virtually everyone in Washington supports “solutions” that are ideologically or politically convenient but don’t make sense as policy. Tea Party Republicans favor killing off Fannie and Freddie and replacing them with nothing—a move that will, at best, hand the mortgage market over to the big banks and, at worst, crater the housing sector. The Obama administration and establishment types in both parties support eliminating Freddie and Fannie but replacing them with … something else. Something perfect! Something that preserves all the benefits provided by Fannie and Freddie, but eliminates the old controversies and doesn’t create new ones, and, oh, by the way, the money to fund this something will miraculously appear, and Fannie and Freddie’s existing $5 trillion in liabilities will miraculously disappear, without any unpleasant ripples. A third option, which no one in Washington supports openly but all do operationally by their own inaction, is to keep Fannie and Freddie as they are: crippled government cash cows that will have to be bailed out (again) with the next (inevitable) cyclical decline in home prices.

There is, however, a fourth option: fix the flaws in Fannie and Freddie and let them operate, as they did—effectively—for more than half a century, as the main public-private guarantors of the thirty-year mortgage. This idea might sound sensible to most Americans. But in Washington it is considered, if not completely insane, then at the very least a political nonstarter. Yet it does have some backers, including certain reform-minded financial analysts, think tank scholars, civil rights groups, lobbyists for small banks, and, curiously, a few hedge fund billionaires who bought Fannie and Freddie stock low and stand to make a killing if the companies are revived. While this odd assortment of players isn’t getting much of a hearing right now, their idea has one advantage over all the others: it would actually work.


Freddie or not: Conservatives unfairly scapegoated the two government-sponsored behemoths for the financial crisis.

It’s impossible to understand why Fannie and Freddie are such a difficult problem to solve without going back to long before the financial crisis—even before anyone had thought to invent mortgage-backed securities.

Homeownership is deeply ingrained in the American psyche, in part because our politicians have always stressed its importance. But for most of the early years of our history, the government wasn’t involved. There were huge ups and downs in real estate, and great variability in the cost and the availability of credit. By the 1920s, mortgages were typically three to ten years in length, and required high down payments—sometimes as much as 50 percent. Homeowners often only paid off the interest, not the principal, so the mortgage had to be repaid or refinanced at maturity in one big “balloon” or “bullet” payment. If someone lived on the West Coast, they might pay double the rate of a person on the East Coast, where more lenders were based.

The Depression, which set off a vicious circle of plunging home prices and lack of access to credit, made a historically bad situation seem completely untenable. By the peak of the Depression, the national delinquency rate was 50 percent, according to David Min, an assistant professor of law at the University of California, Irvine, and lenders—primarily mutually owned building-and-loan societies—were failing in large numbers.

And so the government stepped in. After President Franklin D. Roosevelt took office in 1933, Congress passed the National Housing Act, which created the Federal Housing Administration. The FHA offered to insure lenders against defaults on long-term mortgages with low down payments. It was meant to calm everything down by encouraging lenders to lend—after all, the government bore the credit risk—and borrowers to borrow, by offering them certainty about the interest they would owe, and a long time to pay back the money. In 1936, the FHA reported to Congress that “the long term amortized mortgage has gained nation-wide acceptance at uniform lower interest rates in all sections of the United States.”

The National Housing Act also included a provision that created privately owned national mortgage associations that would buy the new FHA-insured mortgages from lenders. It wasn’t enough for lenders not to have to worry about borrowers defaulting. If they also knew that they could instantly turn their loans into cash, they’d be even more willing to lend. The associations were supposed to be funded by private capital, but in the three years after the new associations were authorized, none were set up. So to demonstrate proof of concept, in 1938 the FHA helped set up a government-owned entity to buy the loans it guaranteed. This entity soon became known as the Federal National Mortgage Association, or FNMA—or Fannie Mae.

In its sponsorship of a congressionally chartered company to help increase homeownership, the United States was, and is, unique. Around the world, the most common mortgage product is a shorter-term adjustable-rate mortgage. Indeed, the rest of the world offers no evidence that you can have a mortgage market like that in the U.S., with long-term, fixed-rate loans, without some sort of system that guarantees risks investors don’t want to take.

For consumers, mortgages are commonplace, even mundane. For investors, they are dangerous—very dangerous. Dick Pratt, who was the first president of Merrill Lynch Mortgage Capital, used to say, “The mortgage is the neutron bomb of financial products.” Mortgages come packed with risks, including credit risk (the risk that the homeowner won’t pay), interest rate risk (the risk that the lender will earn less on the mortgage than it could get investing its money elsewhere if interest rates rise), and prepayment risk (the risk that a homeowner will pay off a mortgage much earlier than expected, thereby forcing the lender to replace a high-paying asset with a lower-paying one). Of those risks, the one that most investors like the least is credit risk. The longer the term of the mortgage, the more risk there is for the lender. And so it’s come to be conventional wisdom that a fixture of American life, the thirty-year fixed-rate fully prepayable mortgage, would not exist for the wide swath of American consumers but for the presence of companies like Fannie and Freddie, which remove the credit risk and disperse the interest rate and prepayment risk to a wide set of investors. The only other country in the world that offers such a product is tiny Denmark.

It wasn’t until the 1960s that Fannie was reborn as what it was originally supposed to be—a private company with all the trappings like stock that could be bought and sold. This was done because in 1967, during President Lyndon Johnson’s administration, a budgetary commission recommended that the debt of agencies like Fannie Mae be included in the federal budget. Adding to the federal debt was no more palatable then than it is today, and so, in 1968, when Johnson signed the Housing and Urban Development Act, he effectively split Fannie in two. The Government National Mortgage Association, or Ginnie Mae, stayed in the government, and guaranteed the credit on only FHA and Veterans Administration mortgages. Fannie Mae, which sold stock to the public, was allowed to guarantee mortgages made to the great American middle class—and its debt stayed off the government’s books. “I was in the government when Fannie Mae was a government-owned institution,” Paul Volcker later told the interviewer Charlie Rose. “And it was created to take care of the mortgage market in times of stress. It was privatized for extraneous reasons. It was privatized to get it out of the budget. Ridiculous.”

At the same time, no one wanted to risk hurting Fannie’s ability to grease the mortgage market. And so the 1968 legislation also gave Fannie some special advantages. One was that the U.S. Treasury was authorized to buy up to $2.25 billion of Fannie’s debt, thereby sending a signal that this was no ordinary company, but rather one that had the support of the U.S. government. Thus began what Rick Carnell, an assistant treasury secretary in the Clinton administration, later described as a “double game.” What he meant was that while Fannie and Freddie were ostensibly private companies, their debt was viewed by investors as being akin to U.S. treasuries, because everyone believed that, if necessary, the U.S. government would bail them out. This was called an “implicit guarantee,” because it wasn’t written down anywhere and didn’t officially exist.

In the ensuing decades, Fannie and Freddie (which was created in 1970 at the behest of the savings-and-loan industry, which wanted their own company to which they could sell mortgages) became two of the largest, most powerful companies in the world. What triggered it was a Wall Street invention—a new way of financing homeownership by packaging up mortgages as securities. The Big Short shows how a Salomon Brothers trader named Lewis Ranieri made the once-stodgy business of selling bonds into a sexy, high-octane gusher of profits, and, while this is true, the real story is a bit more complicated. In essence, Ranieri needed Fannie and Freddie’s guarantee to make investors willing and able to buy his new securities. For a long time, theirs was a mutually beneficial competition, but it’s not as if Wall Street was ever happy about having Fannie and Freddie siphon off some of the profits in the mortgage market. “Wall Street had a love-hate relationship with them,” says one mortgage industry veteran.

But Wall Street couldn’t do much, because Fannie and Freddie had the ear of politicians who saw how fostering homeownership could help them, and the decade of the 1990s was, at least on the surface, a golden age. Although there was some regulatory pressure, Fannie’s political power helped ensure that the regulator was weak and the companies’ capital requirements were low. (The companies were also obligated to make sure that certain percentages of the mortgages they guaranteed went to lower- and middle-income homebuyers, a requirement that later became the key source of the controversy over their role in the financial crisis.)

The mortgage market exploded in size, from just under $3 trillion in 1990 to $5.5 trillion by the end of the decade. Fannie and Freddie, by setting the standards for what kinds of mortgages they would guarantee, effectively determined the sort of mortgage that much of the American middle class would get—and, of course, they took a toll, in the form of a guarantee fee, on every mortgage that passed through them. By the end of the 1990s, Fannie Mae had become America’s third largest corporation, ranked by assets. Freddie was close behind. The companies were ranked one and two respectively on Fortune’s list of the most profitable companies per employee. Fannie, in particular, became known as a place where Democratic operatives went to make fortunes.

The profits were not just from the business of stamping mortgages with a guarantee. In addition, Fannie and Freddie began to hold the mortgages as investments on their own balance sheet. Because of that “double game,” they could make money on the difference between higher yield of the mortgage portfolio and what their cost of funds was. The “big fat gap” is what Alan Greenspan, the very powerful chairman of the Federal Reserve for almost two decades, who became one of the GSEs’ most powerful enemies, took to calling it.

Greenspan wasn’t their only enemy. Bill Maloni, Fannie’s longtime chief lobbyist, used to call the ideological opposition to the GSEs’ very existence the “vampire issue,” because it couldn’t be killed, try though Fannie might. Economists disliked the hidden subsidy in the form of the implicit guarantee. And increasingly, other players in the mortgage industry—the banks and mortgage insurers—were angry about the extent of the profits that Fannie and Freddie were siphoning off.


The Chairman: Franklin Raines went from balancing Bill Clinton’s budget to playing political hardball as head of Fannie Mae.

For most of this period, Fannie and Freddie were able to shut down the opposition to them. Under the leadership of Jim Johnson—whom the Washington Postdescribed in a 1998 profile as “one of the most powerful men in the United States,” followed by Franklin Raines, a former financier who, as the head of the Office of Management and Budget in the Clinton administration, got great credit for balancing the budget, and who people once thought could be the country’s first black president—Fannie Mae developed a reputation for playing political hardball. “Fannie has this grandmotherly image, but they will castrate you, decapitate you, tie you up, and throw you in the Potomac,” a congressional source toldInternational Economy magazine in the late 1990s. “They are absolutely ruthless.” Gene Sperling, who was the director of the National Economic Council in the Clinton administration, used to joke, “If you think a bad thought about Fannie and Freddie, you can hear the fax machine going.” When Richard Baker, then the Republican congressman from Louisiana, began trying to get new, tougher regulation of Fannie and Freddie passed, Fannie squelched it.

The political power had a backlash. Even some of those who might have been expected to be on the GSEs’ side were offended by what they saw as their abuse of power. “The GSEs brought out a conservative side of me,” says Sperling. “The thing that turned me, that made me unwilling to do anything personally for them, is when you see that dynamic where a company is completely dependent on the U.S. government for their profit and they spend so much money and time focused on lobbying the U.S. government. It really gets kind of sick.” The fact that executives like Raines and Howard made tens of millions of dollars only heightened the anger.

But in 2004, a scandal over the accounting at Freddie, and then Fannie—over the charge, essentially, that Raines, Fannie CFO Tim Howard, and other executives had manipulated their companies’ results to please investors—led to the decapitation of the top executives at both companies. The long-standing, slow-burning resentment of the two companies exploded into the open. Fannie’s regulator even called Fannie a “government sponsored Enron.” And yet Fannie’s executives were never criminally charged, and in 2012, after eight years, sixty-seven million pages of documents, and testimony from more than 150 witnesses, a civil suit against Howard, Raines, and another executive ended with the federal judge dismissing all the charges and concluding that there was no evidence that either Raines or Howard had purposefully tried to deceive anyone.

The result was a complete tangle: Fannie and Freddie’s stable management was gone; their institutional reputations were badly tarnished; but no one among the GSEs’ many critics had the nerve—or the political support—to create anything positive out of the mess. So the GSEs rolled on, deeply wounded, with thin levels of capital and ever-more-onerous requirements to make riskier loans as the mortgage market entered its most dangerous period in history.


The Adviser: Gene Sperling, who worked in the Clinton and Obama administrations, said Fannie and Freddie “brought out the
conservative side of me.”

By the mid-2000s, so-called subprime lending, which had started in the 1990s, was taking over the industry. The mortgages were sold to Wall Street, not to Fannie and Freddie; within the industry, another term for subprime was “nonconforming,” because the mortgages didn’t conform to the GSEs’ standards. As an executive from a major subprime lending company called New Century told Congress in early 2004, subprime lenders were necessary to the economy, because they provided credit to “customers who do not satisfy the stricter credit, documentation, or other underwriting standards prescribed by Fannie Mae and Freddie Mac.” He went on to point out that while over 40 percent of New Century’s loans were made to borrowers who didn’t have to verify their income, Fannie and Freddie “have more stringent income documentation guidelines.”

Indeed, as subprime mortgages proliferated, and were sold to Wall Street, Fannie and Freddie were rapidly becoming irrelevant. Their market share fell from 57 percent in 2003 to 37 percent in 2006, according to data gathered by the Financial Crisis Inquiry Commission, which was tasked with investigating the causes of the 2008 financial crisis. A 2005 internal presentation at Fannie Mae noted, with some alarm, “Private label volume [meaning mortgages that were sold to Wall Street, not the GSEs] surpassed Fannie Mae volume for the first time.”

If Fannie and Freddie had stuck to their original business—guaranteeing mortgages made to people who (mostly) could pay—there would have been no reason for a bailout. There will always be people, including Frank Raines and Tim Howard, who will insist that if the seasoned executive teams at the GSEs hadn’t been ousted just as subprime lending was crescendoing, history would have been different. There is no way, of course, to prove that.

One piece of evidence would seem to point against it, which is that even before the accounting scandals, both Fannie and Freddie had begun acquiring hundreds of billions of Wall Street’s private label securities as investments that they would own on their own balance sheets. They did this both because the securities seemed to be a profitable investment at the time, and because—in an incredibly perverse twist enabled by regulators—these loans counted toward the congressionally mandated goals to guarantee loans made to middle- and lower-income people that Fannie and Freddie had to meet.

But it wasn’t until after their executive teams were ousted that the GSEs also began guaranteeing supposedly less risky, unconventional mortgages, like so-called stated income loans, in which the borrower simply states her income. They did this because they were under immense pressure from all sides, particularly shareholders, to win back the market share they had lost. In a presentation for a 2005 executive retreat, Tom Lund, who was then the head of Fannie’s single-family business, put it this way: “We face two stark choices: stay the course [or] meet the market where the market is.”

As the financial crisis gained steam in 2007 and 2008, Fannie and Freddie’s regulator continued to tell the market that everything was fine. “The companies are safe and sound, and they will continue to be safe and sound,” said Jim Lockhart, the Bush appointee who by then ran the agency that regulated the companies, in the spring of 2008.

But at the same time, the government was quietly pressuring the companies to raise capital. Between the start of 2007 and the summer of 2008, Fannie and Freddie sold a combined $22 billion in so-called preferred stock, bringing their total outstanding preferred stock to $34 billion. (Preferred stock pays a dividend like a bond.) The buyers, at least initially, were individual investors in search of dividends, and community banks, who were encouraged to hold GSE securities to bolster their own capital. This preferred stock would turn out to be a huge problem for the government.

By the end of the summer, their stock prices were plummeting, and it was becoming harder for them to sell the debt they needed to fund their operations. On September 5, Paulson pulled what he later called an “ambush.” At Freddie, executives were in New York for board meetings when then CEO Dick Syron received what another executive calls a “nasty gram” from Lockhart, taking back all the things the regulator had just said about the company being safe and sound, and instead leveling a host of charges at it. They were told to come to Washington for a meeting at five p.m. on September 5th at the regulator’s offices. They had no idea what was coming until they walked into the fourth-floor conference room, where they had all been many times before, and saw not just Lockhart but also Paulson on his left and then Federal Reserve chairman Ben Bernanke on his right. There was a provision in the law that if the directors agreed to conservatorship, they were immune from legal action by shareholders or creditors, making it difficult for them to do anything but agree. The management teams were told to go, and both Fannie and Freddie had to immediately fire all their lobbyists. Paulson later called the decision to take over Fannie and Freddie the “most impactful and the gutsiest thing we did.”

In a recent piece in the New York Times, Gretchen Morgenson noted that the bailout terms were “draconian” compared to those soon offered to the big banks. The government got the right to take 79.9 percent of the common stock of both Fannie and Freddie. Why not just nationalize them and take 100 percent? “If the U.S. government were to own more than 80 percent of either enterprise, there was a sizable risk that the enterprises would be forced to consolidate onto the government’s balance sheet,” explained the analyst Laurie Goodman—meaning that the federal government’s debt could skyrocket. Although the Treasury would provide no up-front cash, it committed to putting in a great deal of money—up to $200 billion—as needed over time. Fannie and Freddie would have to pay a 10 percent interest rate on any funds the government advanced. Any money the Treasury put in would become senior preferred stock, which would have to be paid before any investor in either the preferred stock that had just been sold or the GSEs’ common shares got anything. Although these shares continued to trade, their worth plummeted to pennies.

Of course, these were the shares that community banks had just been encouraged to buy (while the regulator was saying Fannie and Freddie were safe). The Federal Reserve later estimated that more than 600 depository institutions in the United States were exposed to at least $8 billion in investment losses from these securities, and that at least fifteen failures resulted. “In effect, for the small lenders serving Main Street, it was let them eat cake,” wrote the Independent Community Bankers of America in a letter addressed to the Wall Street Journal’s editorial board. “Treasury’s takeover [of the GSEs] is crafted to protect the giant players.” What the ICBA meant was that big Wall Street banks had billions of dollars in derivative contracts with the GSEs, so their failure would have ricocheted through the banking sector. But small banks? They could be sacrificed.

Things quickly got worse for the GSEs. During the presidential race between Barack Obama and John McCain, the charge, mostly promulgated by Republicans, that the GSEs were the sole cause of the crisis, and Wall Street just an innocent bystander, first emerged. McCain called Fannie and Freddie “the match that started this forest fire.” It got so bad that Freddie employees were told not to wear anything with a corporate logo, and the company offered its top executives twenty-four-hour security protection. In the spring of 2009, Freddie’s acting CFO committed suicide.

The appeal of blaming the GSEs was, and is, obvious—it’s a way to blame Democrats for the crisis, because, thanks to Johnson, Raines, and others, Fannie was regarded as a Democratic company. And, of course, if the GSEs caused the crisis, and Wall Street is blameless, then no new regulation is needed, and we can repeal the Dodd-Frank financial reform bill.

But that narrative isn’t supported by the GSEs’ loss of market share as subprime lending took off, or by the loss figures. According to an analysis by the Financial Crisis Inquiry Commission, mortgages turned into securities by Wall Street defaulted at a rate that was almost four times higher than comparable mortgages guaranteed by the GSEs, making it awfully hard to argue that the GSEs led a race to the bottom. Nor is it true that loans made to lower-income borrowers caused the crisis. A study published by the National Bureau of Economic Research in early 2015 found that the wealthiest 40 percent of borrowers obtained 55 percent of the new loans in 2006—the peak year of the bubble—and that over the next three years, they were responsible for nearly 60 percent of delinquencies.

In Washington, it’s far from clear that the real lessons matter. “I wish it was simply a matter of telling the truth,” says John Taylor, the president of the National Community Reinvestment Coalition. “This is a political issue. It means you don’t have to rely on facts. You can make up your own.” “People have a visceral reaction to [the GSEs],” marvels one longtime mortgage investor. “People want to say ‘I killed them.’ ”


The Failed Assassin: Tennessee Republican Bob Corker sponsored bipartisan legislation that would have killed Fannie and Freddie, but it never passed.

So if everyone wants the GSEs dead, and they were such a bad idea, why aren’t they dead? “Making policy on this was one of the hardest things by an order of magnitude for the administration,” says a former official. “The danger is that it leads to all kinds of narratives that feel good but ultimately don’t lend themselves to reality. It’s fucking terrible to explain to the public. Both the politics and substance are much more complicated than anyone expected.” He adds, “And if you get the substance wrong, it could be really problematic. This is a major segment of the economy supporting the major asset most Americans have.”

One of the narratives, which is appealing to those on the right, is that we can get the government out of the housing market with the flip of a switch. In 2013, Jeb Hensarling, the Tea Party Republican representative from Texas, authored a bill that would kill the GSEs and, with the exception of some support for very low-income housing, not replace them with anything. While no one knows for sure what would happen—Fannie Mae has been around since the 1930s, after all—most analysts and market participants agree that the downside is that a great swath of the middle and lower classes probably would get five- to fifteen-year mortgages with floating rates, rates that would vary significantly depending on income and geography. Homes would be less affordable, so housing prices would likely fall. Consider that with interest rates at 3.75 percent, a $200,000 home with a 20 percent down payment and a ten-year fixed-rate mortgage on the remaining $160,000 would have a monthly payment of $1,521. With a thirty-year fixed-rate mortgage, the monthly payment is $752. Mortgage capital might be hard to come by in times of stress. Under the new system, not much would change for wealthy borrowers, but the effect on lower- and middle-income Americans could be significant.

A recent paper by the University of Chicago economist Benjamin Keys shows that when mortgages are guaranteed and turned into securities by the GSEs, the interest rate that borrowers pay doesn’t vary much from region to region, even if the economic health of those regions varies. In contrast, the cost of mortgages that are securitized by Wall Street varies much more and is less predictable. This is because the GSEs, with their national reach, engage in cross-subsidization so that, say, borrowers in a struggling region aren’t hit with higher mortgage costs.

Whatever the appeal of the “free market,” the housing industry, including the real estate agents and the home builders, still has enough clout to scare politicians about the consequences destroying their businesses. In addition, even right-wing politicians are afraid of being accused of decimating homeownership opportunities for their constituents. Real estate agents, who are fairly evenly split between Democrats and Republicans, came out against Hensarling’s bill, and it went nowhere.

There’s a deeper problem with the purportedly free market approach. Barring a total restructuring of our whole financial system, getting rid of the GSEs would turn over the mortgage market to the biggest banks. But they were bailed out in 2008, too. Dodd-Frank may have addressed (if not fully fixed) the “too big to fail” issue by, for instance, demanding higher capital requirements on larger institutions. But if such big banks control the nation’s mortgage market, does anyone think they’ll be allowed to fail in the next crisis? In which case, how are they not government-supported entities, as well? Not to mention entities whose political power would make the old Fannie Mae look like a pipsqueak.

There’s an argument, most prominently made by the think tank Bipartisan Policy Center as well as some former administration officials and analysts, that we should be able to put in place a perfect new system, one without Fannie, Freddie, or big banks. “It is simply not true that we are forced to choose between one system dominated by Fannie Mae and Freddie Mac and another dominated by a few huge banks,” wrote Jim Parrott, a former administration official who now consults for various financial services companies, including Bank of America, and Mark Zandi, the chief economist at Moody’s Analytics, who also serves on the board of a large mortgage insurer. (“A Revolving Door Helps Big Banks’ Quiet Campaign to Muscle Out Fannie and Freddie” was the headline of another recent piece by the New York Times’s Gretchen Morgenson.) Newspapers with editorial desks that are opposed to the GSEs, including the Washington Post, often opine on how this “new system” will simultaneously get rid of the GSEs, preserve access to affordable housing, not give control to the big banks, and protect taxpayers. In short, nirvana!

It would be nice if we could achieve nirvana in housing finance. But if it is possible, no one has shown precisely how it would work. With the housing finance system, the devil is often in the missing details, and the one bill that Congress did seriously undertake (a bill that was supported by both Parrott and Zandi) shows how difficult those details can be. In 2014, bipartisan legislation sponsored by Tennessee Republican Bob Corker and Virginia Democrat Mark Warner passed the Senate Banking Committee. The legislation would have killed Fannie and Freddie but preserved a government backstop for the mortgage markets in the form of a new entity. Small lenders were opposed to the bill, because despite reassuring language about how this wasn’t a big-bank giveaway, they viewed it as precisely that. Affordable-housing activists opposed it because while it offered subsidies for the poor, it did nothing for the bulk of lower- to middle-income Americans because it didn’t offer the cross-subsidization created by the GSEs. The housing finance expert Joshua Rosner, who is a managing director at the research consultancy Graham Fisher, noticed that although there was a requirement that private capital bear risk ahead of the government, in the fine print there was a provision that the requirement could be waived—meaning that in bad times, all the risk would go to the government. And, of course, the government was still backstopping the mortgage market. While some in the Obama administration, most notably Gene Sperling, who was then serving as the director of the National Economic Council, worked hard to pass the bill, the administration as a whole didn’t put its weight behind it—President Obama didn’t make any calls to senators who were on the sidelines. The bill ultimately stalled.

Supporters of the bill insist that it is fundamentally different from the current GSE system—but the key component, which is a government backstop, would remain. Says one Wall Streeter about the bill, “It’s like ripping up the whole national highway system just to build another one next to it.” We take for granted the functioning of the highway system, just as we take for granted that the price we’re quoted for our mortgages is going to be in place when we go to the closing—indeed, that the mortgage will be available at all. Even if an untested new system eventually worked, there would for sure be glitches along the way.

As a large aside, neither this bill nor any other proposal has addressed how to capitalize the new system, or what to do with the existing $5 trillion in GSE securities, 15 percent to 20 percent of which are in the hands of foreign banks.


The Co-conspirator: Virginia Democrat Mark Warner joined Corker in trying to take down the GSEs.

In short, it’s easy to say we should kill the GSEs until you start thinking about the alternatives. This is why Frank Raines used to say privately in the wake of the crisis, “We might call them Dick and Harry, but give it ten years, and there they will be.”

Keeping Fannie and Freddie in any form is an outcome to which many, including the Obama administration, are furiously opposed. Some of it is due to the widespread belief that the bailout of Fannie and Freddie proves that their business model was fatally flawed, even though many of the people who say this don’t say the same thing about the big banks. Some is due to the legitimate fear that any entity that has access to any type of government subsidy (even if the guarantee is explicit, rather than implicit), and that operates in an area as politicized as homeownership, will inevitably become corrupt. Some of it is due to the personal animus toward the GSEs that exists in much of Washington. “When they were in their prime, they rolled over a lot of people in [Washington],” one closer observer says. “Now, people are getting even. There’s a lot of that out there. I don’t care which side of the aisle you’re on.” And some of it is due to the power of the idea that the GSEs’ low- and middle-income housing goals were solely responsible for the crisis.

But some of the opposition to Fannie and Freddie is, ironically enough, a direct function of who it is that is pushing for it. Surprisingly enough, it is some of the most powerful hedge funds in the country.

You might recall that when the government took over the GSEs, they left roughly 20 percent of the common shares outstanding and trading, as well as that preferred stock that had been sold in the run-up to conservatorship. Despite the rhetoric surrounding the GSEs, Lockhart even said that the goal was to return Fannie and Freddie “to normal business operations” and that “both the preferred and common shareholders have an economic interest in the companies … and going forward there may be some value in that interest.”


The Profiteer: After making nearly $4 billion from shorting subprime securities, John Paulson bought up shares in GSEs.

In the dark years following the bailout, the GSEs appeared to be racking up tens of billions of dollars in losses. But some investors noticed that the situation wasn’t nearly as dire as it appeared. Under the terms of their bailout, Fannie and Freddie were required to draw money based not on current cash losses or needs, but on when their net worth fell below zero. Net worth is an accounting concept that takes into account estimates of future losses, so Fannie and Freddie were required to draw money based on estimates that they would lose billions in the future. But these estimates turned out to be way too high.

In addition, the bailout forced Fannie and Freddie to pay a 10 percent dividend back to the Treasury on any money they took. Because the dividend payment further reduced their net worths, they had to draw additional money from Treasury to fill the hole created by the dividend payment. According to a FHFA official, around $45 billion of Fannie and Freddie’s $187 billion bailout consisted of draws that took money from Treasury only to round-trip it right back to Treasury to pay the dividend. “It was a complete payday-lender situation,” says someone close to the situation.

Ultimately, Fannie Mae took almost $116.2 billion and Freddie Mac $71.3 billion from the U.S. Treasury, a total of $187.5 billion. One analysis done on behalf of a major investor shows that most of the losses were caused by non-cash charges such as provisions for loan losses that didn’t materialize. During the period in which the GSEs lost money, from 2007 to 2011, the provisions for losses exceeded the actual losses by $141.8 billion. According to this analysis, the combined equity deficiency of the GSEs was really only about $10 billion.

A handful of investors realized that when accounting rules required that the estimated losses be reversed, the GSEs would post staggering profits. And so they began buying up those preferred shares, which were still priced near zero. Some of them, like the hedge fund Perry Capital, had made fortunes betting against, or shorting, subprime mortgages in the run-up to the crisis. Paulson & Co., run by John Paulson, who made almost $4 billion from shorting subprime securities, bought shares. So did a hedge fund run by the Carlyle Group, a politically connected Washington, D.C.-based private equity firm. “We expected the political rhetoric,” says one investor. “We thought, ‘It’s easy for you to say you want to kill them, and that they are an endless black hole.’ But once they were profitable, we thought the rhetoric would change.”

Rhetoric aside, conservatorship is supposed to be governed by the law, which in essence says that the conservator must either “preserve and conserve” the GSEs and release them back, or throw them into receivership, in which case their assets would be distributed to shareholders. The investors argue that even a few years after the crisis, there were sufficient assets that the preferred stockholders would have gotten all the money they were owed.

But then on August 17, 2012, a sleepy summer Friday, Treasury and the FHFA changed the rules of the game. Going forward, instead of paying a 10 percent dividend, Fannie and Freddie would be required to send every penny they made to Treasury. If everything went to the government, then there was no value left for investors. Both the common and the preferred shares plunged in price.

The official explanation for this change is that the administration had no idea that the GSEs were about to become so wildly profitable, and so they executed the sweep of profits to prevent the GSEs from owing money they couldn’t pay. The sheer amount of money the GSEs started making immediately following the sweep makes it hard to believe this.

Another explanation is that the change in the deal came a year after the huge fight in Congress over raising the debt ceiling. Since that time, battles over spending have become commonplace. The profits generated by Fannie and Freddie, which go straight to Treasury, have at critical times helped buy breathing room, or, as Treasury Secretary Jack Lew said in recent congressional testimony, “As a practical matter, it’s what has helped us to reduce our overall deficit.” Thanks to the GSEs’ profits, federal spending was underreported by a combined $178 billion in 2013 and 2014, according to a paper by the Heritage Foundation. Not incidentally, there is no accountability for how the profits from Fannie and Freddie are spent; and once the money is spent, it is gone and cannot be used to buffer any losses they might suffer again.

Eventually, investors, including Perry Capital and Fairholme Capital Management, which manages around $10 billion on behalf of some 180,000 individual investors and a few institutions, sued. To date, around two dozen lawsuits have been filed, some of them by big investors, but others by individual stockowners and pension funds like the City of Austin Police Retirement System. What’s happened in the courts is a drama all its own, but the upshot is that it is impossible at this stage to guess what the outcome might be.

But the lawsuits are in some ways a sideshow to the question of what should be done with the GSEs, and this is the real battleground. What some investors really want is a stake in a recapitalized, albeit reformed, version of Fannie and Freddie, which, they argue, is the right solution—as well as one that would increase the value of their stock.

In response, the Obama administration has made it clear that they will not bring Fannie and Freddie back in any way, shape, or form. Officials refer derisively to the investors’ plans as “recap and release,” meaning that the GSEs would be allowed to build capital, and then we’d send them back out, exactly as they were before the financial crisis. At the Mortgage Bankers Association’s annual convention in October, Michael Stegman, former counselor to the secretary for housing finance policy at the Treasury and now senior policy adviser for housing at the White House, said recapitalizing the companies would be “turning back the clock to the run-up to the housing crisis.” He added that investors had bet big that the companies would be allowed to exit conservatorship “and they are doing everything they can to make sure those bets pay off.” Other officials speak in broad terms about “comprehensive housing finance reform.” As Antonio Weiss, the counselor to the secretary of the treasury, wrote in a recent op-ed, the administration “wants to transition to a better system, one that provides broad access to housing supported by a sound and robust mortgage market, without exposing taxpayers to another rescue.” Once again, nirvana! But, of course, without any details.

One reason for the unwillingness to consider any plan that releases Fannie and Freddie is that politicians don’t want to give up the stream of money flowing into Treasury from the GSEs. It’s also clear that the administration does not want to see investors get paid. (A Treasury official even wrote a memo to then Treasury Secretary Geithner before the 2012 profit sweep citing the “administration’s commitment to ensure existing common equity holders will not have access to any positive earnings from the GSEs in the future.”)

But everyone involved in the housing finance debate—most notably, the big banks that this administration has done so much to protect—has money at stake. Stegman has repeatedly referred to the “failed” GSE business model. But the idea that the GSEs failed relies on inflated loss figures. And if the bailout means the business model failed, then what about the big banks? Isn’t theirs a failed business model too?

The real issue isn’t whether investors get paid. It’s whether we have a housing finance system that makes sense. The investors aren’t the only ones who would like to see Fannie and Freddie reformed rather than eliminated. These include civil rights organizations like the NAACP, who are worried about the plunge in minority homeownership rates since the crisis; affordable-housing advocates, who worry what the world will look like without the GSEs (this summer, the Census Bureau reported that the homeownership rate had fallen to 63.4 percent, the lowest level in forty-eight years); and community banks and other small lenders, who don’t want to lose all their business to the big banks.


The Reformer: The author and analyst Josh Rosner has proposed a solution that would treat GSEs like utilities.

The best idea, whose most prominent backer is Graham Fisher’s Josh Rosner, is that the GSEs would operate as utilities, much like your electric utility, with a cap on the return they are allowed to earn, and regulated as such by a competent regulator with real teeth. The regulator, as Rosner writes, would “ensure that the firms employ their benefits of scale to minimize the costs to end-users while allowing them to earn acceptable, rather than excessive, rates of return.” They would be somewhat like the GSEs were in the 1980s, before all public companies faced inordinate pressure to grow their earnings and please investors. They would be well capitalized at a level consistent with that of other large financial firms, and they would no longer be able to hold mortgage securities on their own balance sheet. (Their portfolios of such securities have already shrunk dramatically.)

Rosner also writes that it is important that the GSEs serve as “countercyclical providers of liquidity.” What he means is that if the market is going crazy, and Wall Street is happily providing mortgage capital, the GSEs can and should stand back. That way, they will have dry firepowder if there are problems, and private capital flees the market. There’s already a taste of how that might work. Today, the GSEs are selling a portion of the risk they insure to other investors. The current way the GSEs sell risk is not without its flaws, but it is a start to doing exactly what President Obama said he wanted, which is getting private capital in front of the government.

This idea isn’t perfect, especially if you believe any government involvement in business opens the door to eventual corruption. It also requires regulatory competence, which is something that has been in short supply in modern times.

One of the major objections is that there’s a conflict inherent in the GSE business model, in which they are publicly traded companies that owe a duty to investors, but also have a congressional mandate to encourage homeownership. Critics say that it is impossible for a company to serve two masters. The utility structure would alleviate the issue, in that investors in such a business wouldn’t be looking for turbo-charged growth, but rather for stability, but the two masters would remain.

But it’s also worth asking whether this conflict is truly the problem that critics make it out to be. There are a lot of evolved companies today that talk about “stakeholder value” instead of “shareholder value.” Indeed, you can argue that the monomaniacal focus on shareholder value hasn’t served our markets so well. Isn’t there a counterargument in which the two mandates—serving homeowners, but with a focus on the bottom line— balance each other? After all, a company with a duty to homeowners but without any responsibility to shareholders could be very dangerous indeed. The bottom-line responsibility, at least theoretically, not only keeps the companies conscious of the risks they are taking but also helps attract a different sort of employee than a pure government bureaucracy might attract. And that is important. The mortgage market is fierce and fast moving. The old Fannie and Freddie could hold their own with Wall Street traders, who are looking for any and every opportunity to make money from slow-moving government institutions. We do not want companies that are completely neutered to serve in this role.

It is true, though, that some wrinkles would emerge in this business model. While requiring the GSEs to get rid of their portfolios will make them less risky, it also means that they will be less profitable, which in turn means less money for affordable housing. While some investors say privately that they support the utility model—and it’s worth noting that there are none who advocate for a simple “recap and release”—it’s also not clear what sort of value owners of the GSEs’ common stock would be able to extract from this model. It’s quite possible that the odd alliance between investors and affordable-housing groups would break down in a bitter fight over who gets what piece of a much smaller pie.

But for citizens and taxpayers, it’s the right answer. We know that the basic infrastructure of the GSEs works, and worked well for fifty-plus years. On the other side, the argument that we shouldn’t settle for something less than perfect sounds a whole lot less compelling once you realize that no one has any vision of perfect, let alone any plan to get there, nor any clue about what glitches or outright corruption might emerge in a new model. And there’s this: all the talk about “comprehensive” reform is just empty words. Now, reform is in Congress’s hands, and one industry lobbyist says that everyone in Washington knows that after the failure of Corker-Warner, the chance that Congress will act is nil. All the words are a pretext for doing nothing.

Yet there’s also a risk to doing nothing. It’s impossible for the private market to resume functioning, even if it can, until the government decides what its role will be. More importantly, because the government has been taking all their profits, at this point the GSEs have less than $5 billion in equity supporting their more than $5 trillion in liabilities, leaving them with a capital ratio of 0.1 percent. To put that in context, when the Federal Housing Administration, which is fully owned by the government, had its capital fall below 2 percent, there was a political uproar over the potential loss to taxpayers. Indeed, the situation is painfully ironic in that the widespread belief is that capital is the one thing that makes the system safer. The largest banks are now required to have a capital ratio that is close to 5 percent. If there’s a recession and housing prices fall again, or if there’s a big swing in interest rates, Fannie and Freddie would have to be bailed out by taxpayers again. Don’t we deserve more of a plan than that?

In The Big Short, there’s a moment when Ryan Gosling tells the audience that he knows this stuff is really complicated, and it seems easier not to care, but that’s really dangerous, because what you don’t know can hurt you. When it comes to housing finance, Americans’ best interests have rarely dictated the answer, precisely because too few people care. That’s another thing the movie got right.

Bethany McLean is a contributing editor at Vanity Fair and the author of Shaky Ground: The Strange Saga of the U.S. Mortgage Giants (Columbia Reports, 2015), from which this article is adapted.
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How Uncle Sam Nationalized Two Fortune 50 Companies

Fortune Magazine

by Roger Parloff   November 13, 2015

Most stories about the financial crisis of 2008, the darkest chapter in American economic history since the Great Depression, come to an end by 2012. That’s when ours begins.

After the housing market bottomed out in 2011 and began its upward trajectory, the nightmare seemed to end. For business it was morning in America again. Most of the too-big-to-fail institutions had either paid back their federal bailout money or were on track to do so. Stocks climbed and stockholders rejoiced.

That was the basic story arc for such titans as J.P. Morgan Chase and Wells Fargo (recipients of $25 billion each in taxpayer largesse), for instance, and for Citigroup  and Bank of America ($45 billion each), and even for the derivative-plagued insurance giant AIG ($182 billion).

Shareholders of Fannie Mae and Freddie Mac, the housing-finance behemoths at ground zero of the crisis, thought it would be their story line too. Fannie and Freddie, shorthand for the Federal National Mortgage Association and the Federal Home Loan Mortgage Corp., are known as government-sponsored enterprises, or GSEs, because of their unique structure: federally chartered yet privately owned.

Charles J. Cooper, lead attorney for proponents of Proposition 8, argues in front of the California State Supreme Court hearing in San Francisco, Tuesday, Sept. 6, 2011. On Tuesday, the California Supreme Court will be considering whether the sponsors of Proposition 8 have a legal right to appeal the federal court ruling that overturned the same-sex marriage ban, since the governor and attorney general refused to bring such an appeal. The 9th US District Court of Appeals, which has main responsibility for the case on appeal, asked the state court to weigh in on the question it deals with the state’s ballot initiative process.

The government had injected $187.5 billion into the GSEs after placing them in conservatorship in September 2008. But both seemed to be recovering on schedule, ending the first quarter of 2012 in the black and posting a whopping combined $8 billion profit for the second.

Yet on Aug. 17, 2012—about 10 days after the terrific second-quarter results were announced—something singular happened. For reasons that remain shrouded in secrecy to this day, the Treasury Department and the companies’ conservator, the Federal Housing Finance Agency (FHFA)—two arms of the same government—agreed to radically change the terms of what the GSEs would owe in exchange for the moneys they had already received.

Instead of a 10% annual dividend on all the bailout funds drawn—a dividend that came to $4.7 billion per quarter—the dividend was now to be set at 100% of each GSE’s net worth. One hundred percent. That is to say, any and all profit they posted. And this would be so in perpetuity. For all practical purposes, the GSEs’ shareholders were wiped out. The two firms, on their way back to health, were effectively nationalized.

The sudden change was called the “third amendment,” an innocuous-sounding designation that belies its momentous consequences. Just how momentous became clear almost as soon as the third amendment took effect, in January 2013. For within months the GSEs began posting the highest profits in their history. And when they did, all those billions were spirited off to the Treasury.

To date, the third amendment has swept into government coffers $129 billion more than the original 10% dividends would have. As a result, the GSEs have now paid the Treasury about $240 billion in recompense for the $187.5 billion extended to them (or actually $189.5 billion, counting fees that were part of the original deal). While that’s not yet a complete “repayment” of principal and interest at 10%, it’s getting close.

Or, rather, would be getting close if any of those payments counted as redeeming even a penny of the $189.5 billion principal—but they don’t. They’re just dividends. The government left no mechanism for Fannie and Freddie to pay back the principal, which is never reduced. So if the GSEs are ever dissolved, the government will still take the first $189.5 billion recovered from liquidation, stepping ahead of the companies’ preferred shareholders, who would have otherwise collectively held at least $33 billion in liquidation rights.

If this strikes you as, well, un-American, you’re not alone.

“I just don’t think there’s any precedent for the government nationalizing two privately owned companies the way it has.”

“I just don’t think there’s any precedent for the government nationalizing two privately owned companies in the way that it has,” says Chuck Cooper, an attorney representing the Fairholme mutual fund family and a group of insurance companies that own millions of preferred shares of Fannie Mae and Freddie Mac.

So Fairholme is suing the government, as are several other funds, insurance companies, and tens of thousands of individuals in a dozen or so suits now pending in at least five federal courts across the country. The cases allege that the U.S. government illegally or unconstitutionally took, without just compensation, Fannie and Freddie—two Fortune 50 companies. (They rank 17 and 42, respectively, on the 2015 Fortune 500 list.) The money at stake here—$33 billion worth of preferred shares and almost $130 billion in diverted dividend payments—places these cases among the highest-valued lawsuits in history.

“A conservator has one constant accepted responsibility,” says Cooper, of Cooper & Kirk in Washington, D.C., who is handling two of the cases and advising on a third. “That is to rehabilitate the entity under conservatorship. Rehabilitate it. Not to hold it in perpetual captivity to harvest its profits for the benefit of the conservator itself. That’s the very antithesis of a conservator.”

The government’s alleged nationalization of two enormous corporations raises potentially landmark constitutional issues—comparable to President Harry Truman’s attempt to nationalize steel mills during the Korean War. Asked to cite an earlier dispute against the government with comparable stakes, Cooper can only come up with the gold-clause cases of the 1930s, when President Franklin Roosevelt and Congress, coping with the exigencies of the Great Depression, abrogated all contractual provisions that permitted redemption of debts in gold. (The Supreme Court largely upheld the action.)

Yet the contest over the third amendment is not just a weighty legal dispute over a sacrosanct constitutional principle—though it is that. It’s also a battle royal being waged between fabulously wealthy, opportunistic fund managers and Uncle Sam. That battle, in turn, is spilling over into the political arena, recasting the debate over housing-finance reform—and, as we’ll see in a bit, driving a sharp wedge between factions of the conservative base.

The fund managers have become key because, for better or for worse, the third amendment is more than just a colossal legal misstep; it’s a colossal investment opportunity. It had the effect of slashing the GSEs’ stock valuations to nearly nothing. Judging the amendment to be legally dubious, investors spied an opportunity to vacuum up GSE securities cheap, strike down the amendment in court, and then make a huge profit when the stock rebounded.

So, like sharks to blood, speculators rushed in, complaining about an alleged taking that, in many cases, occurred before they even got there. Cooper’s client Fairholme, founded by Bruce Berkowitz, began buying in May 2013, amassing about 120 million shares of Fannie and Freddie preferred—with a par value of $3.4 billion—for roughly $700 million. Bill Ackman’s Pershing Square Capital Management hedge fund bought up 10% of both GSEs’ common shares in late 2013. Billionaires Carl Icahn and John Paulson are among other marquee hedgies with skin in the game.

The activist fund managers are now trying to drive the policymaking debate in the direction of recapitalizing and restoring Fannie and Freddie to something like their prior positions—“recap and release,” they call it—which would, not incidentally, maximize the value of their shares. Their arguments—voiced on CNBC, Bloomberg TV, Charlie Rose, op-ed pages, and elsewhere—are plausible, but their conflicts are breathtaking. Under a recap and release scenario, Ackman’s projections show, his stake in Fannie and Freddie common stock—acquired for about $400 million—could in five years top $8 billion in value.

A host of public interest groups have also sprung up to support recap and release. While many of these are doubtless independent of the fund managers—Ralph Nader leads one—the opaque disclosure rules relating to nonprofits make it impossible to tell. According to the Wall Street Journal, one conservative seniors group, called 60 Plus, came up with $1.6 million in the spring of 2014 to mount a TV ad campaign to defeat senators supporting a bipartisan reform bill that would have dismantled Fannie and Freddie, terming it “Obamacare for the mortgage industry.”

Finally, the third amendment is having one additional weird, unintended impact on the political environment: It’s splitting the conservative camp, which had once seemed solidly bent on driving a stake through Fannie’s and Freddie’s hearts at whatever cost. Cooper himself is emblematic of the anomaly. He’s a well-known Republican who has frequently pursued conservative legal causes, from defending bans on same-sex marriage to protecting gun rights. (Senator Ted Cruz, the Texas Republican now running for President, was once an associate in Cooper’s office.)

He’s also a good friend of Peter Wallison, perhaps the single harshest GSE critic in the nation and the one who has most tirelessly championed the view that Fannie and Freddie were the primary causes of the financial crisis of 2008, not mere enablers of more culpable private-sector banks. During the Reagan Administration, Cooper headed the Justice Department’s Office of Legal Counsel—acting, as he puts it, as Reagan’s chief constitutional lawyer—while Wallison served as Treasury and, later, White House counsel.

But while many conservatives still want Fannie and Freddie put to sleep as quickly as possible—the Wall Street Journal editorial board, for instance, has consistently denigrated the third-amendment litigation as frivolous—the front is no longer united. It seems that if there’s anything a dyed-in-the-wool conservative hates more than a GSE, it’s a government taking of a GSE.

The stakes of the housing-finance policy debate are even greater than those of the lawsuits. Historically, Fannie and Freddie have played a central role in promoting homeownership in this country, the traditional gateway to the middle class. They have promoted liquidity and affordability in the mortgage market by buying mortgages, bundling them into securities, and selling them around the globe with an implicit (now explicit) government guarantee. They have been widely credited with having made possible the 30-year fixed, prepayable mortgage—the foundation of the American mortgage market and a rarity beyond our borders.

The Obama Administration has supported ambitious but complex bipartisan bills, known as Johnson-Crapo and Corker-Warner, that are intended to fix what many saw as inherent failings in the GSEs’ hybrid structure—one that privatized gains but socialized losses. The bills would, their sponsors claim, end the GSEs’ “duopoly” over the secondary-mortgage market and replace their implicit government guarantees with more limited, explicit ones. But the bills have stalled.

Seven years into their conservatorship, the GSEs remain adrift, with shrinking capital reserves and no exit plan—a dormant, festering crisis.

As a policy matter, Bethany McLean, a former Fortune writer whose recent book, Shaky Ground, sounds the alarm over Fannie and Freddie’s neglected plight, comes down on the side of the fund managers. “One of the investors gave me the analogy that Corker-Warner was like taking the existing highway structure in the U.S., tearing it up, and building a new one right next to it, with no guarantees that the new one was going to work,” she says.

The point is a good one. But what a strange way we’ve hit upon to make policy in our country. Fund managers identify an investment opportunity, then retroactively construct self-serving arguments for why the nation will be a better place if their bets are allowed to hit the jackpot.

With Congress locked in partisan stalemate, however, it may just be how the sausage gets made.

The government justification for the third amendment hinges on something it calls the “death spiral.” That’s the term U.S. officials have used in affidavits defending the litigation in court. (Justice Department lawyers and spokespeople for FHFA and the Treasury declined to comment for this article.) In a letter last April to Sen. Charles Grassley, an Iowa Republican, Randall DeValk, an official at Treasury, explained that the GSEs themselves projected that “for the foreseeable future, they would be unable to pay the 10% dividends without taking additional draws.” Those new draws would cause them to approach their funding caps, DeValk continued, triggering a new insolvency crisis.

But how could their projections have been so far off, given that Fannie and Freddie were actually about to post their largest profits ever? Those profits, after all, came from one-time accounting adjustments, which should have been foreseeable. By 2013 (and probably earlier than that) it had become obvious that many of the losses the GSEs had incurred during the crisis—the impetus for their having drawn so much money from Treasury in the first place—had been losses on paper only. They had resulted from accountants’ overly pessimistic projections, which, under GAAP, became eligible for reversal when the economic picture brightened. It was these reversals that enabled Fannie, for instance, to book $59 billion in profits for the first quarter of 2013.

FHFA didn’t know that—or so said an agency official in an affidavit submitted in late 2013 in a suit brought by hedge fund Perry Capital.

Cooper doesn’t believe FHFA’s claim. Documents and depositions from officials at Treasury and FHFA, obtained in discovery in a suit brought by Fairholme Funds, show that the government’s story is “highly misleading” in some respects and “outright false” in others, plaintiffs lawyers allege in court briefs.

Instead of a 10% dividend on the bailout funds drawn, the dividends would be set at 100%of each GSE’s entire net worth.
The lawyers can’t tell the media (or even their clients) specifically what the documents and depositions show, however. That’s because Court of Federal Claims Judge Margaret Sweeney has ordered those materials sealed from public view, at the government’s behest. Bewilderingly, the Justice Department has persuaded her that disclosure of that information—concerning a now three- to eight-year-old decision-making process of tremendous public interest—might cause “dire harm” and “place this nation’s financial markets in jeopardy.” But the lawyers have won Sweeney’s permission to send their discovery finds (still under seal) to all the judges handling related cases, which they’ve done.

In any case, the government also stresses that it’s fundamentally wrong to imagine that the GSEs are anywhere near “paying back” the bailout moneys—or that they ever will be. “Treasury did not make a simple ‘loan’ to Fannie and Freddie,” DeValk argued to Grassley. “It made available hundreds of billions of dollars of funding capacity to ensure market confidence in the continued stability of the enterprises at a time when that stability was very much in doubt … Treasury and the taxpayers continue to be on the hook for future losses those enterprises may incur. Any private lender would demand substantial compensation for providing that kind of ongoing funding commitment.”

In September 2014 the government won an early round in the litigation. U.S. District Court Judge Royce Lamberth, of Washington, D.C., threw out Perry Capital’s case and four others, concluding that the conservator had acted within the broad powers given to him by Congress; that the GSEs were so heavily regulated that their stock wasn’t the sort of property that was capable of being “taken” in constitutional terms; and that the conservatorship had already “extinguished” the plaintiffs’ property rights in any event.

The suit is now in the U.S. Court of Appeals for the District of Columbia. But with other cases still playing out in the federal court of claims and in federal district courts in Iowa and Kentucky, the litigation seems certain to last for years and destined to reach the Supreme Court.

In March 2008, when the plummeting housing market caused investment bank Bear Stearns to fail, James Lockhart, Fannie and Freddie’s chief regulator, was sending out broad signals of optimism. He eased certain regulatory burdens on the GSEs, enabling them to issue new shares to the public. “The actions we’re taking today,” Lockhart declared at the time, “make the idea of a bailout nonsense in my mind. The companies are safe and sound, and they will continue to be safe and sound.”

Two months later Fannie issued $7.4 billion in preferred stock. About $65,000 worth was purchased by Jim and Pandora Vreeland of Loudon, Tenn.  Jim, then 61, had been an officer with the Montville (N.J.) Township Police Department before retirement. In 2008, when his mother died and left him a small inheritance, he went to his Wachovia broker seeking advice, he recounts.

It seems if there’s anything a dyed-in-the-wool conservative hates more than a GSE, it’s a government taking of a GSE.

“I’m looking for something to produce good interest, pretty assured,” he recalls telling the broker. “Oh, what you want is preferred shares of Fannie Mae,” he was told. (At that point Fannie hadn’t had an unprofitable year since 1985, and Freddie had never had one.)

Vreeland bought $40,000 worth, at about $25 per share. At the same time his wife, Pandora, acting as the trustee for her father, who had Alzheimer’s, bought $25,000 worth for his trust, banking on the income stream to pay for his nursing-home care.

It wasn’t just mom-and-pop investors who were buying Fannie preferred, even at this late stage. GSE securities had long been favored instruments for community banks and insurance companies. They were safe enough to satisfy regulators, explains Chris Cole, a spokesman for the Independent Community Bank Association, and were considered “a good way to diversify and to improve yield.”

In July 2008, as the economy continued to deteriorate, Treasury Secretary Hank Paulson asked Congress to give regulators beefed-up bailout powers for Fannie and Freddie. That same month Congress passed the Housing and Economic Recovery Act, creating the Federal Housing Finance Agency to oversee the GSEs. Lockhart, who was appointed to head the new agency, got the power to place Fannie and Freddie into either receivership or conservatorship. The roles differ substantially: Receivers liquidate troubled companies; conservators attempt to nurse them back to health and restore them to independence.

Two months later, the week before Lehman Brothers fell, Lockhart put both housing giants into conservatorship. As Lockhart explained that day in a press statement, that statutory process was “designed to stabilize a troubled institution with the objective of returning the entities to normal business operations.”

The following day, Sept. 7, 2008, FHFA and Treasury signed deals with the GSEs setting out the terms of the bailout. Each GSE would issue senior preferred stock to the Treasury, and each could then draw cash as needed to avoid insolvency. In exchange, each would owe a 10% dividend on the money drawn, payable quarterly. To further protect the taxpayer, Treasury also got warrants to buy 79.9% of each GSE’s common stock at a nominal price—$0.00001 per share. (The percentage was kept below 80%, it has been widely reported, to avoid having to move the GSEs’ $5 trillion in assets and liabilities onto the government budget, which would have noticeably increased the national debt.)

The shareholders’ lawyers would later argue that the warrants provision gave private shareholders further reason to believe that the government aimed to eventually recap and release the GSEs. It aligned the interests of private shareholders and taxpayers by giving both a stake in the reinvigorated GSEs. Indeed, if the GSEs returned to health, nobody would benefit more than Uncle Sam. All of this made the third amendment superfluous, if not downright bizarre. “If the government wanted a dividend larger than the 10%,” says Hamish Hume, a partner at Boies Schiller & Flexner and a lead lawyer for a class of preferred and common shareholders, “the original deal made it clear what the government should do: exercise its right to acquire 80% of the common.” Why steal the cow when you can get the milk for free?

During the conservatorship, the GSEs’ shares were allowed to keep trading. Stockholders retained “all rights in the stock’s financial worth,” according to an FHFA fact sheet, though other powers of stockholders were “suspended” and dividends were “eliminated.”

The trading price of the Vreelands’ preferred stock had begun falling in July, when Paulson asked for legislation. The first trading day after conservatorship, it tumbled further, from $14 a share to less than $3.50, and by December it was under a dollar. Fannie’s dividends—the whole point of the Vreelands’ investments—were cut off. Having bought just four months earlier, they received just one dividend before the seizure.

“It was a big loss to a small guy,” says Jim in an interview. “That was the money I was supposed to live on.”

Still, Jim held out hope. “I was led to believe the government would back this up,” he says. “It was a quasi-government agency.” If the companies started making money again, he says, he assumed “they’d come back and take care of the people that had invested in this thing.”

He wasn’t alone. “I read all the documents,” says Tim Pagliara, the CEO of CapWealth Advisors in Franklin, Tenn.  “I felt like the government’s reaction was overblown,” he recounts, and that the companies would eventually get back on their feet. The GSEs’ preferred stocks—like nearly all bank stocks at the time—were then cheap, so he bought some for himself, he says, and put 276 of his clients into it as well. Eventually some super-sophisticated investors, like Perry Capital, began buying the stock too.

For a couple of years the GSEs booked huge losses. In December 2010, Pandora Vreeland gave up on her father’s Fannie preferred, selling it for 56¢ a share, salvaging $520 from a $24,874 investment. But her husband, Jim, held on to his.

In August, FHFA and Treasury lowered the boom, announcing the third amendment. Jim Vreeland’s shares dropped 55%, from $2.35 to $1.05, and a day later they were worth 86¢.

“I thought it was a typo,” Bruce Berkowitz, the founder and chief investment officer of the Fairholme mutual funds, told journalist McLean of the moment when he first read the third amendment. “This can’t be right,” he continued, as recounted in Shaky Ground. “It’s like I took 80% of your house in the financial crisis, because you couldn’t pay, and then you somehow crawled your way back, and instead of saying, ‘Wow, you made it!’ I say, ‘Now I’m going to take 100%.’ ”

Seeing a golden opportunity, Berkowitz started buying these dirt-cheap Fannie and Freddie preferred shares in May 2013. Other funds were gorging on them too, pushing up the value of the shares. (Thanks to these speculators, Vreeland was able to unload his shares in March 2014 for between $10.40 and $12.70 per share, recovering nearly $18,000 of his $40,000 principal. Of course, his dividends were lost forever.)

Berkowitz then retained Chuck Cooper to try to get the third amendment struck down. In July 2013, he filed two cases for Fairholme, one in federal district court in Washington, D.C., and one in the federal court of claims.

Cooper was the obvious go-to guy for this assignment. His 13-lawyer boutique, based in a stately New Hampshire Avenue townhouse near Dupont Circle, specializes in suing the government, including “takings” cases. (Takings cases are those predicated on the clause of the Fifth Amendment that reads: “nor shall private property be taken for public use, without just compensation.”)

Cooper, who speaks with a soft Alabama accent and sometimes whips himself into fervors worthy of a jury summation, cut his chops in this realm by winning United States v. Winstar before the U.S. Supreme Court in 1996. In that case, which arose from the savings-and-loan crisis of the 1980s, healthy thrift institutions had been induced to buy sickly ones with the lure of certain regulatory accounting breaks, only to see those benefits abolished by Congress a few years later.

The legal challenges in the Fannie and Freddie suits come in two main flavors. The true “takings” cases, claiming that Uncle Sam stole billions of dollars from shareholders, seek damages from the U.S. government. The other suits instead seek court orders invalidating the third amendment and reversing its effects. They argue, for instance, that FHFA acted beyond its powers under the Housing and Economic Recovery Act.

Although the takings concept seems to best capture the injustice the plaintiffs feel, those cases may be harder for many to win or be less lucrative. There’s some question about whether plaintiffs who bought shares after the third amendment was announced (like Fairholme and Pershing Square) even have the legal right to seek damages for a taking. Also, since GSE shares were already quite cheap by the time of the third amendment—Fannie common was just 30¢ on Aug. 16, 2012, and fell only 6¢ after it was announced—a court might value a taking stingily, even if persuaded that one occurred.

If the plaintiffs succeed in invalidating the third amendment as beyond FHFA’s statutory power, on the other hand, many of their lawyers hope to win an order that would force the Treasury to count the nearly $130 billion paid in excess of the 10% dividend as a paydown of bailout principal. That would enable the GSEs to begin to rebuild capital and resume normal business, which would ultimately restore value to their shares.

In Congress, the struggle over whether and how to replace the GSEs continues. In mid-October top Obama administration officials reiterated their opposition to recap and release, squelching rumors—spread by activist investors, they suggested—that they might be undergoing a change of heart.

In an interview, Sen. Bob Corker, the Tennessee Republican, insists that while he opposes returning Fannie and Freddie to independence as a policy matter, he has nothing against the GSE shareholders. “Those individuals have rights, and nothing we’ve done has had anything to do with interfering with those rights,” he claims. “They’ll have their day in court. At the same time, this is just a fact: These entities would not be generating one penny of income if the federal government wasn’t standing behind them.”

Journalist McLean doesn’t second-guess the government’s decision to put the GSEs into conservatorship in the first place. “I have a hard time arguing with things done in the fog of war,” she explains. “But morally, the third amendment was done in a calm and happy time. It was calculated. The reason that has been articulated for it does not make sense, and it’s pretty clearly not true. That’s incredibly unpleasant for anybody that cares about the abuse of government power.”

She’s right. And the law isn’t as legalistic as cynics sometimes think. Gut checks count.

The spectacle of a conservator wiping out shareholders just as the companies he’s supervising are about to have their best years in history simply doesn’t smell right. It’s hard to picture the Supreme Court letting it stand.

Matt Taibbi: Rolling Stone

Matt-Taibbi

Why Is the Obama Administration Trying to Keep 11,000 Documents Sealed?

By Matt Taibbi   April 18, 2016

It’s not quite the Panama papers, but one hell of a big pile of carefully guarded secrets may soon be made public.

For years now, the federal government has been quietly fighting to keep a lid on an 11,000-document cache of government communications relating to financial policy. The sheer breadth of the effort to keep this material secret may not have a precedent in modern presidential times.

“It’s the mother of all privilege logs,” explains one lawyer connected with the case.

The Obama administration invoked executive privilege, attorney-client and deliberative process over these documents and insisted that their release would negatively impact global financial markets. But in finally unsealing some of these materials last week, a federal judge named Margaret Sweeney said the government’s sole motivation was avoiding embarrassment.

“Instead of harm to the Nation resulting from disclosure, the only ‘harm’ presented is the potential for criticism,” Sweeney wrote. “The court will not condone the misuse of a protective order as a shield to insulate public officials from criticism in the way they execute their public duties.”

So what’s so embarrassing? Mainly, it’s a sordid history of the government’s seizure of mortgage giants Fannie Mae and Freddie Mac, also known as the government-sponsored enterprises, or GSEs.

The papers being fought over concern both past and future controversies, all of them quite complicated. At the root of all of them, however, is a fight over the assets and financial power of the currently zombified GSEs. It’s a pitched battle over the future of the American housing market, and the sealed papers likely contain a covert history of the war to date.

Some background:

After 2008, everyone hated Fannie and Freddie, and for good reason. These quasi-private companies are essentially giant piles of money that were intended to advance a simple, utility-like mandate to keep credit flowing in the housing markets.

In the pre-crash years, however, the firms’ leaders acted less like the stewards of utilities and more like sleazy Wall Street hotshots. They made hyper-aggressive business decisions because their bonuses were tied to earnings growth. Some executives even engaged in Enronesque accounting manipulations in an effort to jack up their bonuses even further. These efforts led to record civil fines.

Contrary to popular belief, the one thing they weren’t guilty of was causing the 2008 crash. As the Financial Crisis Inquiry Commission later concluded, the GSEs were followers rather than leaders of the subprime craze. They invested far less recklessly than did the giant Wall Street firms primarily responsible for inflating the housing bubble.

In fact, it’s a little-known subplot of the financial crisis that bailout-era Fannie and Freddie was turned into a kind of garbage facility for other Wall Street institutions, buying up toxic mortgages that private banks were suddenly desperate to unload.

As early as March of 2008, then Treasury Secretary Hank Paulson was advocating using Fannie and Freddie to “buy more mortgage-backed securities from overburdened banks.”

And at the heat of the crisis, none other than former House Financial Services Committee chief and current Hillary Clinton booster Barney Frank praised the idea of using Fannie and Freddie to ease economic problems. “I’m not worried about Fannie and Freddie’s health,” he said. “I’m worried that they won’t do enough to help out the economy.”

Even after the state took over the companies in September of 2008, Fannie and Freddie continued to buy as much as $40 billion in bad assets per month from the private sector. Fannie and Freddie weren’t just bailed out, they were themselves a bailout, used to sponge up the sins of private firms.

The original takeover mechanism was a $110 billion bailout, followed by a move to place Fannie and Freddie in conservatorship. In exchange, the state received an 80 percent stake and the promise of a future dividend. All told, the government ended up pumping about $187 billion into the companies.

But now here’s the strange part. Within a few years after the crash, the housing markets improved significantly, to the point where Fannie and Freddie started to make money again. Lots of money. The GSEs became cash cows again, and in 2012 the government unilaterally changed the terms of the bailout.

Now, instead of taking a 10 percent dividend, the government decided that the new number it preferred was 100 percent. The GSE regulator, the Federal Housing Finance Agency (FHFA), explained the new arrangement.

“The 10 percent fixed-rate dividend was replaced with a variable structure, essentially directing all net income to the Treasury,” the FHFA wrote. “Replacing the current fixed dividend in the agreements with a variable dividend based on net worth helps ensure stability [and] fully captures financial benefits for taxpayers.”

Translation: We’re taking all your money, not just the money you owe.

In court filings later on, the government offered a strange excuse for this sudden and dramatic change in the bailout terms. It explained that at the time, the GSEs “faced enormous credit losses” and “found themselves in a death spiral.”

The government claimed that the poor financial condition of the GSEs would force the Treasury to throw more money at the operations, increasing the total commitment of taxpayers and leading quickly to insolvency. It absolutely denied any foreknowledge that the firms were on the verge of massive profitability.

It got weirder. Despite the fact that the GSEs went on to pay the government $228 billion over the next three years, or $40 billion more than they owed, none of that money went to paying off Fannie and Freddie’s debt. When Sen. Chuck Grassley asked aloud how it was that the company and its shareholders were not yet square with the government, the Treasury Department testily answered, in essence, that the bailout had not been a loan, but an investment.

This was not a debt that could be paid back. Like a restaurant owner who borrows money from a mobster, the GSEs found themselves in an unseverable relationship.

Remember, the other bailout recipients after 2008 were mostly all allowed to pay off their debts as quickly as possible, to get out from under restrictions imposed upon them by the government. Firms that took bailout money were allowed to pay far earlier than expected, in less than a year in some cases, allowing companies like JP Morgan Chase, Goldman Sachs and Morgan Stanley to get out from under executive compensation restrictions and other temporary reforms.

Not Fannie and Freddie. The much-loathed mortgage giants were kept in a perpetual coma, neither fully alive nor dead, and forcibly converted into a highly lucrative, and highly irregular, revenue source for the federal government.

All of this behavior prompted a series of lawsuits. Shareholders in Fannie and Freddie were naturally more than a little pissed at having the government permanently forestall any chance they might have at ever having their investments in the company pay off.

In the discovery battle in these suits, the government’s pleas for secrecy were so extreme that it asked for, and received, “attorneys’ eyes only” status for the documents in question. This meant that not even the plaintiffs were entitled to see the raw papers. This designation is usually reserved for cases involving national security or proprietary business secrets.

But there were no nuclear codes or plans for next-generation cell phone technology here. Instead, it was just a very strange history of government officials expropriating a monster pile of cash from a pair of political-albatross mortgage companies.

Why the extreme secrecy? The seven documents unsealed by Judge Sweeney last week offer only a hint of a reason. The materials are definitely embarrassing. Among other things, they demonstrate that not only did the government know the GSEs weren’t in a “death spiral,” it was actually quite confident in their future profitability well before it changed the bailout terms. Then and now, government officials lied about what they were doing, and why.

But there might be more to this story. Likely also buried in the still-sealed documents is a wealth of information about the government’s plans for future reorganization of Fannie and Freddie, a huge looming event in the history of American finance.

Many of the government officials who were involved in the decisions surrounding the GSE conservatorship are now in the private sector, working on proposals for much-anticipated GSE reform.

Without getting too deeply into the weeds of this even more complicated tale, government officials have been working with Wall Street lobbyists for years on a plan to have a consortium of private banking interests step into the shoes of Fannie and Freddie.

If this concept actually goes through, it would be the unlikeliest of coups for Wall Street. Having nearly triggered a global depression eight years ago, the usual-suspect, too-big-to-fail banks would essentially be put in control of the same housing markets they all but wrecked last time around.

This would be a nonstarter politically, the ultimate public-relations disaster, were it not for the fact that Fannie and Freddie are about the only companies on earth less popular than the Wall Street banks. Still, replacing the one with the other would be madness by any objective standard.

Are the gory details of that plan what the government is working so hard to keep under seal?

We may never know. Judge Sweeney has yet to rule on the vast majority of the documents, and there’s no guarantee that she will ultimately unseal the remainder of the material. We may never find out what the government was so keen on keeping secret.

The only thing that is clear is that there’s something odd going on, with the Obama administration asserting privilege over a volume of papers so large, it would make Nixon blush.

“I’ve been doing this for 20 years, and I’ve never seen anything like it,” says David Thompson of Cooper and Kirk, one of the attorneys fighting to unseal the material.

This is exactly the sort of story that tends to fly under the radar in the American media. It’s complicated and full of numbers and faceless officials and executives. There is little hope that even the most salacious series of Treasury documents can out-duel Donald Trump or the Bern-Hillary showdown for airtime. But whatever this is, it matters and we’d better keep an eye on it.

“Sleeping on Things” by Luska

The following piece was posted on timhoward717.com by Luska on April 13, 2016 at 8:01 AM. Posted as originally written:

“Sleeping on things” has always been a reasonable policy for me,even though my work throws me into a fast paced environment ,often chaotic. That said, as I awaken this morning ,I cannot help feel sad,discouraged if not a bit lost. So many of us ,through the democratic process need to and count on the government we elect, to at least try to do the right thing and to be transparent and honest about it. My job does not give me the luxury of time to be sure the Government is looking out for the best interests of the people who elected them;we just assume that they will do their job as I do mine and use the media vehicles ,such as the WSJ to quickly check that it remains so
But now , those shreds of doubt, the talk of ,government “conspiracy” theories and the blatant Treasury (government) lies have been exposed (with yesterday’s release) one cannot help feel someone despondent for the future. Here, we have a Government, which takes two apparently healthy companies,tells everyone they are financially stable, then days later invites a secret meeting to tell select investors to short the stock as the proceed to place the companies into unexpected Government control at a ridiculous price despite a 1% loan from the Treasury being available to them (2008). This essentially impacted significant losses to the average taxpayer’s retirement funds and investments.But the WSJ told us it was necessary,and we believed.We assumed that the purpose of conservatorship was to reform and stabilize the companies at the time,and when ready ,release (the 3R’s). New investors ,after DD ,joined in ,as they should.Then the second “whammy” (2012) ;the NWS and the 3rd. amendment. Although, setting this up was illegal at the time,the Government told us that the Companies were in a “death spiral” and they and the “taxpayers” needed protection and the only way to do this was to fully nationalize and take all their available revenue. Again, the WSJ,along with the Urban Institute and others told us that this was true and the majority believed and many still do. But the lawsuits were not expected (Perry , Fairholme) and were brushed off as “greedy ” hedge ” funds ( by the WSJ) rather than defenders of American rights, freedom and the constitution. Thankfully they pursued as did this blog,as the average person was hand tied and did not have the resources to do such.
The Perry decision (2014) now as it turns out ,was based in part by Government perjury (Ugolletti), now (yesterday) exposed . In Nov. 2015, as the “house of cards ” began to tremble with talks of settlement, the Government again reached into its propaganda like control of the media with more untrue rhetoric from Lew, Corker,Stegman and Weiss in an unexpected attack.
But today ,as we wake up, we see the house of cards now falling. We understand that the Government has not only been hypocritically non-transparent,but has used a major media stream (WSJ) (through access privilege) to outright lie to the people that they serve.That they knew windfall profits were coming and for whatever reason (buried somewhere in the Treasury books) wanted the money for other reasons rather than follow their designated roles as true conservators of 2 very vital companies. So what now? What else have we been lied about? What else is hidden under the cloak of “executive privilege”? How can we look at the Government/Treasury and remotely see them as trustworthy or even credible in discussing anything ,including housing finance? What happened to the rights of people? Who is left to protect the poor, the middle class,and the future generations? This exposure of blatant Government/Treasury lies through the release of these few documents, is indeed and will become a dark day in American history for our government, but a real day of enlightenment for its people